Earnings Preview: Yahoo's Future Hangs In The Balance

Yahoo may have doused one raging fire this week, settling with Carl Icahn, but there's still another blaze burning: the company's underlying business, and that may take far more effort to put out.

There has been so much noise, so much distraction, so many headlines, so much attention paid to Icahn, Microsoft, the will-they-or-won't-they saga gripping this company, that we haven't spent much time examining Yahoo'sbusiness. And with so many troubling signs swirling around this company, this might be the part of the story that needs a lot more study.

Consider that this time around, analysts are expecting second quarter earnings of 11 cents a share on $1.38 billion. But analysts that expect this company actually to meet those numbers are few and far between. And that's a little unusual. Expectations are so seriously dampened because most of the people I'm talking to, both inside and outside Yahoo, say the company has been so seriously distracted by trying to fend off Icahn and Microsoft. That's a problem for Yahoo. Shareholders want to know that the company is on the ball, that a strategy is underway, that it's working, that this is indeed the right management team at the right time for this company. If Yahoo really does miss today, it might shake investor confidence, and that could resonate loudly at next week's shareholder meeting.

For comparison purposes, Citigroup's Mark Mahaney published his "cheat sheet," which is always helpful. GAAP EPS north of 10 cents would be considered positive, below 9 cents would be negative. (He's at 8 cents, by the way.) North of $1.38 billion in revenue would be good; south of $1.37 billion would be bad. (Mahaney expects $1.38 billion.) Full year guidance above $7.6 billion would be good; south of $7.5 billion would be bad. (He's expecting $7.49 billion.)

Other metrics to watch: owned and operated display ad revenue should grow between 12 and 15 percent year over year, O&O gross search ad revenue up between 16 and 18 percent year over year, and fees revenue should be around $220 million.

Sanford Bernstein is already anticipating slower sequential revenue growth. We already know that display advertising, which was once the bright spot of Yahoo's results, and key differentiator from Google until its deal with DoubleClick closed, has been hit hard. That doesn't bode well for the company. We've already seen from eBay'snumbers last week auto sales, both new and used, have fallen off cliff, and these are key advertisers for Yahoo The company has detailed some rosy growth projections that some on the Street dismiss as too optimistic. Nonetheless, if the bad outweighs the good, and Yahoo misses, and doesn't offer something a little beyond optimistic, these shares could be in trouble.

That said, there's been a lot of talk on the Street about what this company might do to assuage concern, and offer some kind of financial carrot to investors. Stifel Nicolaus suggests there could be some kind of special shareholder dividend, and many others say the company could announce the spin-out of its Asian business, worth about $12.5 billion -- including a $2 billion stake in Alibaba; both ideas put forward by Microsoft but ultimately rejected by Yahoo. That doesn't mean Yahoo won't do it and claim the initiatives as its own, however.

Still, this all comes down to business, not rhetoric, and whether Yahoo is growing at the clip it promised, and whether the numbers satisfy investors. The pressure is certainly on this company to perform. And to give investors a reason to believe in Yahoo again. This company will be in damage control mode for some time to come, well beyond next week's meeting. All the rancor, squandered opportunities, questions about fiduciary responsibility, and concerns about board and corporate leadership evaporate if Yahoo can start performing again. Trouble is, there's not a clear indication it can. Shares lost 29 percent last quarter and they're continuing their slide again today, threatening to dip below $20 a share. Microsoft's $33, $47.5 billion offer is a distant memory, and judging by today's share action, it appears investors still have plenty of doubts

(Note: Keep it tuned to CNBC through the day Wednesday where we'll be running clips from my exclusive interview with Yahoo president Sue Decker. We'll load the entire interview here as well.)